Good day, and welcome to the AIB Q3 2022 trading update conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. For operator assistance throughout the call, please press star zero. Finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. Colin Hunt to begin the conference. Mr. Hunt, over to you.
Thank you very much indeed. Good morning, ladies and gentlemen, and welcome to our Q3 trading update call. Donal and I will make some brief opening remarks before we turn over to you for your questions. We're pleased with the performance of the group, and we are confident in our outlook, notwithstanding external uncertainties. At the start of the year, I described 2022 as the hinge year for AIB, the year when we would conclude on legacy issues, embed our inorganics, and reduce NPEs decisively below 5%. That's precisely what we're doing, and the results are very clear and tangible in this statement. Reported strong profitability in the third quarter, good income momentum and loan book growth.
EUR 9 billion in new lending, year to date at the end of September, up 25% from the prior year period, with new lending up 33% in Q3 over Q3 2021. With EUR 3 billion new lending in Republic of Ireland mortgages up 60%, we're demonstrating clear volume growth alongside pricing discipline. Our NPEs are now down to 3.9% of gross loans, and we're well on track to reach our medium-term target or end 2023 target of 3%. At the same time, demonstrating ongoing strength and resilience in our balance sheet with our CET1 ratio at 15.4%. Turning to the economy, while there has been a scaling back of growth forecasts for the main world economies in 2022 and 2023, Ireland remains relatively resilient.
The latest forecast now see Irish GDP growth above 8% for 2022, with modified domestic demand growing by 6.5% . For 2023, the combination of emerging capacity constraints, a weak global economic backdrop, tightening of monetary policy and overall financial conditions, as well as the negative impact of higher inflation, are expected to see a moderation in Irish economic growth momentum. Nonetheless, on a relative basis, we still expect the economy to perform relatively well in 2023, with estimates of between one and a half and two and a half percent growth before recovering to around three point three percent in 2024. In terms of the implementation of our strategy, we're making good progress on the embedding of our inorganic transactions.
We have now migrated over EUR 1.5 billion of the Ulster Bank corporate and commercial customer loans. The transfer is going well. We're very pleased with the progress there, and we expect to complete that migration in the spring of next year. On the Ulster Bank tracker portfolio of EUR 5.7 billion, we are in an approvals process with the CCPC at the moment, and we expect a positive response which will see those loans migrating in towards the end of the first half next year. Our plans to launch a JV with Great-West Lifeco to significantly enhance our range of products in savings, investment, pensions, we expect that to launch by the end of this year.
In terms of customer recruitment, we're very pleased with how that's going. We have something of the order of 350,000 new accounts opened, which is an increase of 82% over the prior year period. Given the significant changes in the Irish banking landscape, the evolving operating environment and the increase we've seen in interest rates, it is appropriate now for us to refresh our medium-term targets. We'll be bringing that through internal governance over the course of the next number of weeks. We'll update the market on the second of December, so in about 5 weeks' time. With income growth exceeding what we're seeing on the cost side, we see upside potential to ROCE, which we describe as our North Star. I'll now hand over to Donal.
Thank you very much, Col. I think that the Q3 numbers are, represent growth from our organic basis, on our inorganic basis. The ECB meeting yesterday was well-received within AIB and all of the eyes in very much within our expectations. On the cost side, we're obviously seen some inflation pressures. Some of the are half in nature. Some of them which we expect [inaudible]. As we move towards 2 December 2022, we wil update the market with our revised cost numbers there. Capital obviously remains strong 15.4% of the end of the Q3, due to strong profitability. So I think [Alibratash] hand it over to questions from any of the participants.
Thank you, speaker. At this time, I would like to remind everyone that in order to ask a question, please press star then one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
First question comes from the line of Raul Sinha from JP Morgan. Raul, please go ahead.
Hi. Good morning, gents. Thanks very much for the update and taking my questions. I've got two, please. Firstly, I was just wondering if you could give us a little bit more color on NII in terms of the guidance change. What are you assuming now in terms of your base case assumptions around the greater than 15% growth? Obviously there's been some pricing change in the market as well as in terms of any color you can share in terms of what you expect on deposit pricing. And then the second question I had was just on the ECL charge and the outlook.
I was wondering if you could talk a little bit about, you know, the drivers, as you see, maybe just looking beyond this year, particularly around, the U.K. If you've got any thoughts on your very small book in the U.K., obviously, but you know, what might be the kind of risk attached to that in, going into next year?
Okay, thanks very much, Raul. Obviously, guidance for AIB throughout the year has upgraded because we started the year with a, you know, a base case assumption that the ECB deposit rate would be -0.5%, and things have moved really quickly from that front. The guidance to 15% is imagining a year-end deposit rate of 1.5%. And obviously we have said greater than 15% in our NII guidance given the trajectory for that rate is obviously a little bit higher than that. But obviously will only feed into the last quarter of the year. I think within the NII guidance, we hadn't assumed any benefits from TLTRO because there was great uncertainty.
I think now we do have a little bit more certainty around that. The benefit to AIB in the calendar year of 2022 will be probably EUR 20 million- EUR 30 million, and that'll obviously cease as at the 23rd of November. In terms of our interest rate sensitivities, obviously I last published those at June at the half year. And they really haven't changed much to date, as NII in euros from an endpoint. But there is some moving parts from that. Obviously, when the form of the TLTRO changed, that would have reduced the sensitivity somewhat. Throughout the year, we have also, as the yield curve steepened quite aggressively, put on more structural hedges.
You know, at the end of the year, we might have had EUR 10 billion of structural hedges in euros. I think towards the end of this year, that could be more like EUR 22 billion or EUR 23 billion. That's given us some interest income benefits throughout 2022. Obviously, that will flow into 2023 as well. And then on pricing, the changes to date in Euroland in Ireland have not really fed through into market pricing as of yet.
Post the last ECB change, we would have changed our fixed rate mortgages, new business offers by 50 basis points, reintroduced a fixed term deposit rate, and obviously on the pricing side, we keep these things under constant review with respect to the external environment and indeed the domestic competitive environment as well. Needless to say, I think the trajectory of rates from the ECB seems quite clear. With respect to asset quality, you know, we're maintaining the guidance for the year for a small charge. Underlying business, we see very little signs of stress in any of our portfolios or in any of the books. We have to accept that the impact of higher rates, higher inflation have really yet to begin to bite.
You know, we will be cautious as we come to the end of the year. We've come into the year well-provisioned, and we wanna exit the year well-provisioned as well, which is why we're maintaining that small charge for the year. Specifically to the U.K., as you mentioned, you know, we obviously would have exited the U.K. SME business last year. The quantum balance sheet quantum is smaller in the U.K., and we haven't done significant new business in the U.K.
The main activities that we have there in the wholesale space in energy, in quasi-government related property lending transactions, we're pretty comfortable with those positions at the moment, but do accept that you know, the macro environment in the U.K. has been quite volatile of late. You know, our expectations in the U.K. from the U.K. perspective, you know, we are, I would say, just taking quite a cautious approach, just waiting for things to bed down a little bit over there. We don't really have significant growth assumptions for the years ahead.
Got it. Thank you.
Our next question comes from the line of Grace Dargan from Barclays. Please go ahead.
Hi. Good morning. Thank you for taking my questions. Maybe if I could just firstly come back on the hedge. Note the comments about increasing the hedge into the year end. I guess, do you still see scope to increase that into 2023? Or would you say that year end position is broadly where you want to be positioned in terms of notional? And in particular, I guess, of what you've put on, kind of what's the average weighted life of that, or how has that changed to your hedge? And then secondly, I'd just like to ask on the TLTRO, given the news yesterday, would you potentially look to repay what you have early, or do you think you could utilize that in another manner and kind of invest elsewhere with that excess liquidity? Thank you.
Yeah, thanks very much. Obviously, you know, arguably through the COVID period, you know, we had come into that period, I would argue, somewhat underhedged. You know, we had imagined a more normalized environment. Through COVID, everything looked negative out in perpetuity. You know, by which time or so it was too late to be considering a serious hedging activity. What it effectively meant is that as we have come out of that environment and the rate environment has changed, we had a lot of capacity to put on hedges. You know, we had avoided doing any hedging at either negative rates or what we would have considered suboptimal rates.
You know, just falling into that trap of, you know, locking in duration, you know, in an ultra-low environment. That's what really changed this year. The capacity is, in fact, created from the growth in liabilities, which obviously grew through COVID. You know, we had a thought that they might be, you know, that would dissipate or that those liabilities would be spent in some shape or form. In a large part, they did. We had the change in the Irish banking environment where two of five banks decided to leave town. Our liabilities continued to grow, which just creates more capacity for structural hedges.
Look, given the fact that the environment is pretty volatile, we kind of put on our hedges on a rolling one-month basis, which we will continue to do for 2022 as the liabilities continue to grow. The duration of those hedges is really only two or three years. They're short-dated in nature, really reflecting you know the uncertainty around the environment and trying to figure out what balances will endure and which ones will not. Going into 2023, I don't believe that we will be putting on any new hedges of that size because I don't believe that the liability side is gonna grow at that same pace.
Rather, we'll just be doing normal standardized rollovers and reinvestments. On the TLTRO, you asked if we would repay it. You know, news only out yesterday, we're gonna consider this, you know, from a holistic perspective. You know, our loan-to-deposit ratio is 61%. Our LCR is up in the 160s. You know, we have a really strong liquidity position. You know, always good to have contingent liquidity. You know, I think we'll keep it under review. You know, the only benefit to say is obviously visually might improve your net interest margin number, but it's actually not an income effect. We'll weigh up those items.
Look, nevertheless, TLTROs will legally mature throughout 2023 anyway, so I don't think we'll be talking about it for too much longer, to be honest.
Perfect. That's really helpful. Thank you.
Thank you, Grace.
Next question comes from the line of Diarmaid Sheridan from Davy. Please go ahead.
A question or two as well, if I may. Firstly, just around, maybe returning to net interest income for a moment. You talk about the interest rate sensitivity. If we just concentrate on the euro side, the EUR 300 million for 100 basis points. Obviously, you've had 200 basis points increases so far. You know, is it too simple to just say that that equals EUR 600 million of NII benefits on an annualized basis, or is there something else that we need to consider on that? That's the first question. The second question is maybe to put parameters or some manners around what to expect in December, and specifically on capital return.
At that point, do you think you'll be in a position to maybe more tangibly set out your plans on a holistic capital return model? Or do you think that will still be something that during 2023 you're going to need to consider and work on? Thank you.
Okay. With respect to the sensitivities, I think the reason I like the sensitivities is because they aggregate an entire balance sheet into one number, and allow me to speak to it at a very high level. You know, at that highest level, you know, the sensitivities in Euro land, as of now remain the same as what they were at the half year. You know, with some of those moving parts, which I mentioned earlier. Reduction from TLTRO, reduction in the sensitivity from structural hedges and obviously an increase from, you know, just accumulating liabilities as we onboard more and more Ulster and KBC customers. The question on whether to, you know, lift and drop those numbers to the outer years, I think. I mean, that is very much for you.
It's based off a various set of assumptions. Those assumptions then, you know, will depend on whatever market consumer behavior is gonna be throughout 2023 and 2024. Ultimately, I think in 2023 and 2024, we will come into or reenter a more normalized banking environment with assets and liabilities being priced differently than what they were in the negative rate environment. You're gonna see on the liability side, you know, the reintroduction of, you know, term products, notice products, et cetera. Obviously, you know, you're already seeing on the mortgage side changes in the rates there. You know, whether it be on trackers automatically from the ECB or from fixed rate new fixed rate business mortgages rising overall.
I think if you look at the sensitivities, and if you look at our net interest income and how guidance has changed throughout the year, I think you'll be able to see that the pass-throughs is quite well reconciled between those items. That's certainly the reason why I would have given the NII, the interest rate sensitivity tables from Q3 of last year was really to use that or to help you use that as the best guide for our NII trajectory. I think with respect to December the second targets update, I think you can reasonably expect that there's going to be, you know, an update to costs and cost of risk given the inflationary environment.
I think all of the balance sheet trajectory, and really it's gonna be back solving this into an ROTE endpoint, which is what we're busy working through at the moment. Obviously one of the inputs to the ROTE calculation is going to be the CET1 ratio, which is currently 13.5%. We will provide an update and some color around that at December 2nd.
Sorry, is that something that you're likely to do or is that going to be later into 2023?
I think the return story remains consistent, okay? For us, this is really focused in 2022 on ensuring the performance is as strong as possible and utilizing our normal dividend policy payout ratio. So that's for 2022. The medium-term targets that we update are gonna be beyond that. When we define a CET1 target around that, we will obviously talk to ways in which we would imagine reaching that over a period of time.
Great. That's very helpful. Thank you.
Our next question comes from the line of Chris Cant from Autonomous. Please go ahead.
Good morning. Thanks for taking my questions. If I could just come back on a couple of minor points on the hedge. So from a terminology perspective, when you say duration of 2-3 years, do you mean you're using 2-3-year swaps, or do you mean that you're using kind of four and five year swaps, and the duration being half that? I just wanted to clarify what you meant by that. In terms of the size of your structural hedge, you speak specifically to hedging derivatives. Should we be assuming that the Irish fixed mortgage book of sort of EUR 11 billion-EUR 12 billion is also part of your effective structural hedge position? I'm just trying to think about comparing to peer banks where we get commentary around structural hedge size.
I think they would include anything that is effectively part of the structural hedging if it's not specifically a derivative. On costs and targets, in terms of the cost guidance you've given for this year, you mentioned some of the inflationary pressure is kind of structural, some of it is sort of one-off in nature, I guess the temporary hedge that you've taken on to manage client onboarding during this period of change in the market. Should we be expecting that cost number of EUR 165 for this year to be increasing into next year? Because obviously the previous cost guidance, and I appreciate it was given quite a long time ago, is somewhere below what you're pointing to for 2022 specifically now. Just wanted to test the water there.
Appreciate you're gonna give us an update, but how are you thinking about those pressures that seems to have been building progressively? Thanks.
Just thank you, Chris. Just in relation to the cost guidance, I think that the cost guidance was given at a time when the group looked fundamentally different. It was prior to the various inorganic transactions, and of course, it was in a fundamentally different inflation environment. We are not comparing like with like at this particular point in time. Now, on an underlying basis, our costs are up 2%. They're up 7% in total, but that takes into account the impact of the transactions that we have been engaging in. Where we have potential to influence and control our cost line, we have been taking very decisive action.
Earlier this year, we concluded an agreement with our trade union, which was balloted upon to have a three-year pay deal, 4%, 3%, and 3%, 2022, 2023, 2024. We have pretty decent certainty in relation to the labor cost inflation across the group. Of course, we've also now concluded a power purchase agreement, which will cover 80% of the group's energy requirements over the course of the next 15 years.
Thanks. I think on the.
If I look at the costs for 2022, you know, there's a few ways to look at it, but we recently made a one-off payment to, let's say our non-managerial staff cost of living adjustments, that will have an effect of EUR 10 million, which obviously wasn't imagined at the half year. We have other items which I would consider, they kind of straddle 2022 and 2023, and they're very much related to, whether it be inorganic activities or surge capacity to capture market share from some of those exiting banks. Obviously, because it's straddling over the years, it is gonna have a 2022 and 2023 effect. I do.
At the December the second update, I will do a look back and reconcile from the old target, notwithstanding we're in a very different environment, and give a forward-looking trajectory. You know, our real focus is ensuring that all of the inorganic activities we said we were gonna capture and land, we do that as expeditiously and as safely as possible, and also with respect to the opportunity from the departing banks that we really focus on trying to capture as much of those customers as we possibly can. You can see, like overall new accounts opened, if we were to look at that as a metric, up 85%, 250,000.
I think of the market share of the banks that are leaving, we believe that we are taking a very large market share of those customers who are moving. You know, customer acquisition strategy is the focus for us. That's on the cost side. Specifically to your structural hedge questions, when I look at the sensitivities, that's obviously completely bank-wide. Incorporated in that, you could have a fixed rate mortgage and a derivative. I specifically wanted to mention the derivative piece because that would have been something that has grown and accumulated quite quickly this year, and that quantum that I referenced was all interest rate derivative related, so on top of everything else.
When I say the duration was, you know, 2-3 years, that is fixed rate, receive fixed 3-year, 2.5-year, 2-year type of hedging that we put in place as the liabilities continued to surge. It wasn't, you know, a case of doing, you know, a series of swaps from 10 years out to 1 week with a lower duration. It was very targeted in that 2-3-year area, you know, as interest rates spiked in that part of the curve, and our liabilities surged really through Q2 and Q3.
That's really helpful. If I could just ask one follow-up, please. In terms of the comment around rate sensitivities, you said the rate sensitivities are unchanged versus the first half. Obviously if you're applying structural hedges, that would tend to reduce your stated
Yeah.
One year rate sensitivity. Is there offsetting kind of positive underlying adjustments going on in the background, i.e., the hedge is growing, but your assumptions around deposit betas, rates pass through, et cetera, have become more favorable, resulting in kind of a round trip back to where we started? Or was it that the hedge expansion was primarily something that happened at the end of the first half?
No, I mean, we didn't make any changes to the assumptions in our sensitivities other than, let's say, adjusting the form of the TLTRO, okay? From its legal maturity to a, you know, just an overnight type of exposure. That was the only, let's say, methodology change. The sensitivities haven't per se changed either because I've made any assumption around deposit betas. You know, just given the fact that our liabilities have continued to grow, that has been the main offset, which in euros leads us back to a similar enough position than where we were at the end of June.
Okay. That's really helpful. Thank you.
Our next question comes from the line of Borja Ramirez from Citi. Please go ahead.
Hello. Good morning. Thank you very much for taking my questions. I have two quick questions, if I may. Firstly is regarding the deposit pricing. So I would like to ask the competitive dynamics, given the fact that some banks are exiting the market. Is this impacting positively in the cost of deposits? And then my second question would be if you could please update on the amount of macro overlay provisions, and what are the GDP assumptions in your IFRS 9 model? Thank you.
Just on the competitive dynamics in terms of deposit pricing, I suppose the key thing to remember here is where our LDR is. Like we are awash with liquidity at this stage. You know, as we adjusted our rates on the asset side, we did want to introduce some adjustment on the liability side. We changed our pricing in terms of new fixed rate mortgages going forward, but we also announced our intention to introduce a 25 basis points rate for deposits above EUR 15,000 with a one-year term. We are alert to the competitive dynamics while very conscious of the fact that we are in an exceptionally strong liquidity position with an LDR, as I said, in the very low 60s%.
Yeah. I think with respect to asset quality, I think at the half year, we would have had post-model adjustments of around EUR 400 million. I've been quite focused this year on trying to ensure that COVID-related PMAs that were put in through the crisis, that they all, you know, either perform or underperform, and we take them out and not to conflate them with, you know, whatever we're coming into in the future years. As we look towards the end of the year, like I said, asset quality underlying book performance is really, really strong.
You know, it's likely the only way, you know, that we will end up with a small charge for the year is by implementing some form of post-model adjustment for, let's say, the net disposable income effect. Really you're gonna be talking about, you know, weaker borrowers in the personal space, potentially in the mortgage space as well, and on a small PMA to take account for that. But you've got to remember that you know, that throughout 2021 and 2022 all of our legacy non-performing exposures were effectively resolved. Typically, when you come into an environment like this with higher rates, you know, redefaults of NPEs is your main risk.
You know, we did manage to resolve most of those pre-COVID NPEs before, you know, or throughout this year as we go into 2023.
Okay. Given that we are past the hour at this stage, we have run out of time, I think. The IR team are very, very happy to take any further questions you might have on this release this morning. Can I thank you all for your attendance and look forward to speaking with you again in five weeks' time.